Evil Speculator 101

So I found myself waking up last night and habitually reached for my iPad to catch up on emails and check my systems. Of course I wound up peeking at the blog as well and then for some reason decided to head over to the Slope to see what those bears were up to these days. I have to concede that I don’t visit there often as I truly have my hands full with running my own blog, maintaining various automated systems, coding and bug fixing, attending customer support duties – and then there of course are my own trading activities. Not a weekend goes by where I do not spend a minimum of five hours working on various projects behind the scenes or am preparing for the week to come.

That doesn’t leave much time for virtual socializing as I barely manage to catch up with the comment stream over here at the lair. But I always had a soft spot for the Slopers as I used to be one way back in the early days. And for some reason that sentiment appears to be mutual as much to my surprise Tim actually mentioned me in the very post I was reading. And yes in case you wonder, it was a positive plug – deservedly so or not.

However more importantly - some of the various points Tim was highlighting as part of a rather candid self analysis really chimed with me as they outlined the very challenges we have worked very hard to address here at Evil Speculator. And I dare say issues we eventually managed to overcome in time with a lot of effort. So if I may be so bold to offer some assistance here – by offering solutions that you hopefully will not wind up ignoring. To quote Winston Churchill’s commentary on man: “Man will occasionally stumble over the truth, but most of the time he just picks himself up and stumbles on.”

I have been a financial blogger for over six years now and believe me – I know how how most of you guys think and operate as I have literally seen thousands of people come and go. Personally I myself have walked through the shadow of the valley of death on several occasions – not only in the course of my own trading endeavors but also in my interactions with my readers, critics, and followers. Because it turns out that the pursuit of what actually works, i.e. what makes you a consistently profitable trader, is not just one of the most difficult personal challenges you may face in your life, but also happens to be very unpopular. Which really is an interesting contradiction if you happen to run a trading blog as a side business. Of course you want to turn retail rats into winning traders but while readers may expect excitement and get rich quick systems, you offer nothing but hard work, sacrifice, and the discipline to show up every day and do the same boring thing over and over again. Not exactly a tantalizing recipe in the face of an audience with the average attention span shorter than that of a goldfish.

The sad truth that has to precede the remainder of this article is that most of you will fail in becoming successful traders on a long term basis. Yes, I just said that, and if you disagree with that, well then please stop reading right now and just move on, because I cannot help you. Now Tim is way too kind and jovial to be telling you this but fortunately for you I am not. There is a reason why I’m operating as Evil Speculator and it’s not just due to an admittedly dark sense of humor. Which helps but the real challenge lies in overcoming your personal daemons and implementing positive habits whilst at the same time suppressing a large portion of your most deep rooted human instincts.

Now telling all this will accomplish exactly nothing as most of you will simply move on to the next post and forget all about it within a matter of days. So instead I am offering to work together with Tim Knight and the rest of the Slopers to produce your own system. One that has a long term edge – and most importantly you are comfortable trading on a daily basis. But first things first – let’s take it from the top – I am going to compile a list of the personal hurdles that Tim has presented and will address them one by one:

  1. Inability to implement knowledge into action and personal change.
  2. Personal beliefs.
  3. Directional bias.
  4. System and/or market hopping.
  5. Overcoming emotions.
  6. Quantitative vs. qualitative aspects of trading.

Inability to implement knowledge into action and personal change.

How many of you have more than three trading books in your bookshelf? How many own more than 10? How many have more than 20? Have you read them all? Why aren’t you trading any of those systems? Because they don’t work or because you are unable to follow them? Are you attending trading seminars? How much have you invested into all that? $500 – $1000 – $10,000 – more? I think you get where I’m going with all this. Unless you are new to the trading game odds have it that you have already absorbed a mountain of knowledge and trading related information and most likely that learning curve will continue as long as you follow the markets.

So the problem is not the quantity of information really – it’s being able to absorb useful information and to apply that to making successful trading decisions. In most cases less is actually more – back in 2012 I wrote a post on maintaining a strict information diet and I invite you all to read it. However whatever information you choose to absorb on a daily basis – ask yourself: Is this information useful to making successful trading decisions? If that answer is not a resounding yes then it’s nothing but noise that will distract you from your core mission (i.e. banking coin). So don’t make the mistake of equating information with knowledge.

Once you have found statistically verifiable information that you believe will lead to successful trading activities then you must take steps to implement them into your personal life. The fact is that over time you will come across many excellent systems that have a clear long term edge but which you are unable to pursue due to a variety of personal reasons. Perhaps the drawdown periods are too deep for you, maybe the entries happen too frequently during the day, the system doesn’t take enough trades for your taste (lack of opportunity), it works best in markets you are not comfortable trading (e.g. futures, forex, bonds), your account size does not permit proper position sizing. The list is long and it’s one only you can answer for yourself. Don’t expect to abide by even the best system in the world if the qualitative aspects of that system are incompatible with your personal beliefs, dispositions, and life style.

Personal beliefs.

You probably expect me to say that your personal beliefs do not matter but actually it’s the other way around. They matter the most as you will not be able to pursue a system that is not in line with your personal beliefs about the market and how to take advantage of opportunities on an ongoing basis. And I’m not talking about drawing lines on charts either. Look, I really don’t care about what anyone paints on any chart – if I am not able to turn that information into winning trades it’s just noise to me.

Most retail traders are focused on market analysis while professional traders are focused on developing a low risk idea.  To quote Van Tharp on the subject: Market analysis for most traders amounts to building a straw house. They collect data about the markets; they look at different patterns of charts and specific market indicators; and they even make predictions about the future direction of the market and then focus on trying to help those predictions come true. However they consider the probabilities of winning and losing or the amount that may be won or lost. In other words, what most traders do in terms of market analysis has nothing to do with making low risk trades. Hunters build straw houses, but that activity has nothing to do with catching prey.

So instead of ‘charting’ or ‘market analysis’ I simply think about developing low risk ideas. I start out with various ‘beliefs’ that I have developed over the years and then put them into context with the market. For instance I personally enjoy using Net-Lines, a price pattern technique I stole from Chris Carolan a few years ago. They work very well for me but they don’t mean zip to Scott – a fellow from Australia who I have been collaborating with over the past few years on automating various trading systems. Even if trading Net-Lines turns out to be a promising idea for taking entries Scott would never be able to trade them as the concept doesn’t chime with his particular market lens. We all have one by the way – a lens that is – a way of observing and processing information given to us on a chart. It’s all a matter of how we are wired mentally.

Some of us share a similar lens while others use one very alien to us. For instance 2sweeties from Italy (a contributor on the Slope) uses a sophisticated blend of statistics and fibbonaci retracements. Works very well for some – others will find it difficult to build a system around it. Most of you Slopers seem to enjoy bearish markets – I expect maybe also for a number of reasons beyond the scope of your trading activities, but also perhaps due to the inherent characteristics of bear markets. Meaning high volatility combined with directional trending tape. They are actually a lot more difficult to traverse then you would expect but that’s a different story. Bottom line is that you need to sit down and write down your personal beliefs about the market – where you believe opportunities can be found and how you plan to take advantage. Here’s an example using Net-Lines really quick off the cuff:

  1. I believe that Net-Lines produce statistically valid support and resistance levels.
  2. I believe that these levels grow exponentially weaker as time progresses.
  3. I believe that inverse entries prior to a breach and directional entries post breach should be taken.
  4. I believe that exits should be set at the opposing end of the trigger candle.
  5. I believe that entries should resolve into producing 1R within the following two candles or the odds for a reversal increase significantly.
  6. I believe that an accumulation of several Net-Lines of equal direction (i.e. sell or buy) increases significance.

And so on – I could probably list five six more and you may agree with some or none of them. But that’s not today’s exercise and it’s just an example and a first step in developing your own system. Once you have produced a set of beliefs about the market you start develop a system around it, which unfortunately is beyond the scope of today’s article. I merely attempted to demonstrate that personal beliefs are important and can actually be leveraged in developing a system that works for you personally. If there is any interest I would be happy to produce a pertinent series which covers this step by step. The offer stands Tim! ;-)

Directional bias.

You would be right in saying that it’s probably a bad thing. However it seems that many traders are unable to look in both directions and see the same amount of opportunities. Perhaps it’s because their mind is wired in a particular way – or it’s based on past experience. You can either fight it (my approach) or perhaps you can simply take advantage of it. Fine – you only like to take short trades – I bite! Then develop a system that only goes short – problem solved! What you should NOT ever do however is project your own directional biases onto any particular market. You want equities to crash and burn? That’s a rather perky disposition you got there tough guy – now see what happens over in reality. Mrs. Market is not kind to opinionated people – usually instant punishment is generously lavished.

System And/Or Market Hopping

Tim mentioned that he recently started trading binary options in collaboration with Dutch. Now there’s nothing wrong with exposing yourself to other markets and I encourage you look at all of them. However don’t expect any of them to be the answer to your personal limitations. They are not better or worse – simply different – that’s all. Forex trades differently than the futures – stocks are loosely tied to various market segment ETFs but the latter trade completely differently and have their advantages and disadvantages. Binary options sound like fun but require a win rate of over 50% for you to reach break/even. Futures offer leverage and require overnight margin – stock options are also highly leveraged but are what they call a wasting asset. All these different type of markets requires a different trading approach and it’s up to you to figure out which may work best for you. I personally like forex and the futures – but that’s me – I like things simple and I also enjoy trading 24×5.

The same applies to systems – many retail traders move from one system to the next – like nomads. They try their ‘luck’ with a promising one and at the first drawdown pull out and move on to the next system. Which is inherently the worst approach one could take as you keep taking drawdowns and then move on to another system, most likely during its earning period, which statistically speaking is prone to experience a drawdown in the near future.

Overcoming Emotions & Cognitive Biases

I have written about this subject in much detail in the past and if you’re familiar with my work you know that it’s an uphill battle. No matter how well you know yourself and how hard you work on it – you’re only one or two trades away from turning into an sobbing emotional wreck. It never ends and it’s a battle you will wage until the end of your days – and don’t believe for a minute that you are immune. The best thing you can do is to produce a system with iron clad rules and take yourself out of the equation as much as possible. Tim mentioned that he kept looking at gold and was happy that he ‘had dodged a bullet’.

That’s exactly the opposite of what you should be doing – sorry Tim. If you have a system then your entry happens in a very specific fashion and once you take that entry you already know when you will exit. I actually decided to not talk about stops anymore as they are an emotionally laden term. People equal them to ‘stop the bleeding’ or ‘stop the pain’. Which is another reason why I don’t talk about money or percentage even – I simply refer to ‘risk’ which is referred to as R – some trend traders call it N. You devote R (usually between 1% – 2% of your assets) to a position, set your stop (ahem) and then you walk away. Either it gets to target or it’ll exit at the point you require the campaign to end. If that sounds too complicated I can help – here’s a risk calculator for the futures and here’s one for you forex aficionados.

The rules are there to protect you from yourself. And that includes, me, you, Scott, Tim, Bill Dunn, Richard Dennis, William Eckhard, Ed Seykota, everyone. We are all flawed human beings and the less we are involved the better our systems are able to perform. In essence – give it enough time and we just mock it up.

Quantitative vs. Qualitative Aspects of Trading.

Nick Rage produced a great video that demonstrates how most people focus merely on the quantitative aspects of trading, meaning system development, campaign management, risk management, etc. As a matter of fact many of the views I present here are covered and I strongly suggest you watch it in its entirety. It also makes a point about trading systems on a long term basis which is another Achille’s heel of most retail traders.

This has turned into a rather lengthy post but believe me that I’ve only scratched the surface. Developing your system is actually the tiniest aspect of it all – the majority of your trading activities should actually revolve around managing yourself. Trading involves human performance and that performance can be objectively measured in terms of profit and loss. You cannot hide from your performance record, no matter how much you may want to mentally rationalize your losses. And since you are the most important factor in your performance, doesn’t it make sense to spend time analyzing yourself? The best traders do it constantly but subconsciously. So be one step ahead of everyone else and do it on a conscious level.

Let me conclude this with another Van Tharp quote (clearly I’m standing on the shoulders of giants today): Successful trading is 40% risk control and 60% self control. In turn the risk control portion is one half money management and one half market analysis (i.e. developing low risk ideas). Thus market analysis is only about 20% of successful trading. Yet most traders emphasize market analysis while avoiding self control and de-emphasizing risk control. To become successful, traders need to invert their priorities.

Happy hunting.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Advanced Thor – Working Without A Net

Scott here. Judging by the emails Mole and I get there are a few of you trading Thor without a proper business plan to go with it.

Let’s be clear. Mole just sends you the signals, how you take them is always a matter for your system, and how position sizing limits work within your system needs to be defined right from the start. The problem for any system which trades more than one markets is correlation. Whatever you “think” the worst case correlation risk is on any given day, you can probably triple that.

Human beings are a smarter than usual species of apes. Monkey like banana, but monkey no count banana well. Always see potential banana and never see potential for banana to be taken away. Makes Scott ANGRY! Every setup look like many banana potential, even when setup marginal at best. Sometimes even see banana where no banana exist. Sometimes not see dangerous predator because too busy looking for banana. STUPID BANANA! But love banana so much, must keep chasing banana!

Technically any setup which is entered at roughly the same time will be correlated to some degree. (read that again it is very important) Every setup measured in USD (gold, copper, soybeans, bonds) is correlated in some degree. Every setup which is a “risk off” asset or “risk on” asset is correlated to some degree. Obviously all the JPY crosses are correlated, all the CAD crosses, etc. All the bonds, all the grains. But GBPJPY is correlated with ES futures, no doubt at all. So you need to apply some intelligent rules of your own design here.

One solution is to trade a tiny subset of markets. Some people take this to the extreme and trade only a single market. I’m a firm believer that this is suboptimal, however if you have different market beliefs (we after all only trade our beliefs) that may not be true for you. To be clear I would never take a potential setup simultaneously in Gold and Silver, ES and YM, AUDJPY and GBPJPY, etc. That should most definitely be explicitly in your rules.

HOWEVER. There is a big difference being stopped out on a long held winner (which is actually what you want) and stopped out day one for a big ass loss. Let’s say you have a winner running for a few weeks in Wheat and get a setup in the same direction in Corn. Would you take it? My personal rules tell me to take it. You might be uncomfortable with effectively pyramiding like that, or you might not. Your rules need to cover it.

Thor has an unusual characteristic in that around 50% of the 1R stopouts happen on the first day, and the big winners are often held for 3-4 weeks. So you accumulate positions like a junk hoarder. Right now in my main account I have 9 positions open, all risking 1.5% of equity, which is about normal. The more positions you have open the more opportunity for human error, market fuckery, mechanical problems where things trigger in a short space of time placing you under pressure. I have someone paid to check my work, which works very well and holds me accountable. This is my current open positions with open profit (in USD) and you can see of the 9 open positions 8 are in profit to some degree or other. This is a pretty typical day, equity was down about 1.1R overnight, a LOT of those positions still have the potential to fuck me over (stops not at breakeven)

real account

What I suggest is to have a risk profile that suits YOU. If you are relatively risk averse I would suggest a limit of 4 POSITIONS WHERE THE STOP IS NOT AT BREAKEVEN OR BETTER. If you are trading high R values 3 positions might be appropriate. Possibly also a maximum % of account used in margin.

In my main account to calculate position sizing I also assume that any position with a stop not at breakeven will potentially stop me out, so I calculate the 1.5% based on equity less 1R for every position not at breakeven. This is sensible to ME, but may not work for you.

I trade 2 accounts, a real account with lots of money in it and a “cracker account” which I trade at high R value and every time I get a little money in I pull some out and live off it. I try and leave the cracker at between 40 and 50K and pull out 10K increments to live off. Except for paying taxes and the like I don’t really touch the big account, but I’ve learned (from Ivan actually) the value of taking profits out to “make it real” even though this is mathematically suboptimal. I very much like the cracker account/real account dichotemy. The cracker account is a small enough portion of my total equity that if it is totally wiped out it won’t make any difference to me, and I find it emotionally satisfying on a deep level to “eat what I kill” and pull $10K out now and again and treat myself to a nice holiday or something I want.

For instance in my cracker account which I trade for income at 4% R value (significant and real risk of ruin)  I hit margin limits very quickly. I cherry pick the best setups and by necessity cannot take every setup. This is the current state of the account, which started trading Thor in August (switched from my previous systems) at $28000 and have pulled out $20,000 along the way. This is a 5 month return of 230% and an annualized return of over 500%. However even though this account is at fresh equity highs, it has endured peak/valley drawdowns of 30%  - not for the feint hearted.

open positions


You can see it is using 47K out of 61K in available margin, and I have only 4 positions open. So one more position would max me out, and if those positions move against me (multiple positions have the annoying habit of moving in lockstep one way or the other) have me getting nasty margin call phone calls from the broker. So trading the cracker account for 4% R value involves me cherry picking the “best” setups - which brings in subjective elements which makes life hard/stressful/confusing. This is a difficult approach. Of COURSE it is difficult, shooting for over 400% / year SHOULD be difficult, right?


Anyway, I hope this gives you some ideas.

chopper (1)

Scott Phillips

Market Weather Basics

In the past few years I have spent quite a bit of effort categorizing distinct market phases as they clearly can affect both discretionary as well as automated system trading. I often also refer to it as ‘market weather’ and my first treatise on the subject was two years ago in a pertinent post. It mostly focuses on the psychological aspects of how market gyrations affect trading behavior and distorts perceptions among market participants. In combination with a trader’s respective cognitive biases various market conditions will affect one’s daily activities. Whereas a swing trader may be perfectly happy and successful playing the swings in a volatile sideways market a trend or system trader may run into draw down periods, thus affecting discipline due to recency bias.

Of course there are various technical approaches of how to categorize market periods and among my favorites are Van Tharp’s SQN based approach or the StretchStat and VolStat indicators developed by Ken Long. Scott recently covered those in his posts, so if you want more meat on your sandwich then I suggest you point your browser here.

In today’s post however I want to go back to the basics as you don’t really need any fancy indicators in order to develop a pretty good ‘feel’ (if I may use that word) for categorizing various market periods on a chart. The human mind is actually pretty damn good at pattern matching – and with a bit of practice it’ll quickly become second nature. So let’s cover a few core markets of recent past, starting with the bonds.

This is actually a wonderful example as the difference in the two prevalent phases couldn’t be more salient. Starting in early January until the end of the month bonds pushed up significantly in what I would call a low to mid volatility trending phase. If you recall Scott’s treatise on the subject – that is a very common period and one I would categorize as easy to slightly challenging for the average trader. Of course your mileage will vary greatly – again for a trend trader this can be fun, for a swing trader this is more challenging as reversals/corrections are shallow.

The inverse speaks true to what followed – a high volatile sideways market which I consider the most difficult for most retail traders. The reasons for that are plenty and have been rather prolific on this subject and prefer to not repeat myself in this post. Suffice to say that anyone with a directional opinion or expecting resolution will be taken the woodshed all the way through Sunday.

Here is another example – the spoos on which I highlighted three distinct phases. The sell off in January was rather directional but with some volatility in the middle. What followed was a low volatility trending phase. Of course any indicators won’t tell you that until you’re halfway in but the human mind can easily pick up the fact that we have very few overlapping candles and most importantly 10 consecutive higher highs in a row.

Since about mid February things however got a bit more dicey and I would categorize the recent month as a volatile sideways period – once more the most difficult to trade for most participants. Psychologically also rather taxing and it has been taking its toll right here in the comment section (which has been rather quiet in the past two weeks). I always try to warn you guys when I see storm clouds on the horizon but often get the impression that very few are listening. Perhaps educational posts like these will serve to instill a bit more sensitivity as to when trading can be easy and when it can feel like helping Sisyphus push a rock up a steep hill.

Another example gold – I think one of the reasons why we have been rather successful in trading the shiny metal is that gold has the habit of switching between volatile sideways and trending phase with a mix of volatility, usually medium to heavy. You probably remember our gold entry in early February at which point I was expecting gold to continue trending higher. What I did not anticipate is that it would make a sudden u-turn but what’s interesting is that the market phase has barely changed – we are still trending and volatility is probably identical to what it was on the way up. So clearly we must differentiate between direction and market phase. For the seasoned trader direction may be insignificant but retail traders often get married to a particular direction, with the expected results.

And then there are charts which are almost impossible to categorize – I usually stay away from those unless I see then knocking on very pronounced inflection points (a subject for a different day). But when you look at a chart just like this – what do you see? What I see is acceleration followed by slower periods. In terms of volatility that creates a strange mix – the tape looks pretty directional but it’s rather volatile. But clearly this is NOT any easy chart to trade, would you agree?

Here is another example that may be even more pronounced – the fabled natgas contract Just look at how different these market phases are and I haven’t even bothered trying to categorize them. An accumulation of slow/sideways tape followed by quick spikes, long wicks, and sudden reversals. I also see a lot of gapping action and for a futures contract that is very rough to trade. Once again, stay away unless you really know what you are doing.

In summary – market phases are much neglected but integral part of trading and one you should come intimately familiar with. System developers often thrive to write systems that offer a lot of opportunity by being in the market all the time. That’s understandable but it is largely based on an unrealistic assumption that the same entry and campaign rules will work in all market conditions. Instead you will find that some systems promising only a very small or no edge may suddenly work extremely well if used only in the context of certain market conditions. To that end it is important that you sit down and document the characteristics and beliefs of your trading activities and then correlate them with the various market conditions you will encounter. Again, that in itself deserves its own post and I think Scott has definitely pointed the way.

My own work is strongly influenced by market categorization and without padding my own shoulder many here would agree that it has kept us out of various traps in the past. This morning’s spike higher for instance could not have been predicted but it had pretty good odds given what we saw on the Zero as well as in the context of the tape we experienced in recent weeks. Which is why I happily exited my TF trade yesterday according to the rules.

In essence what you always want to ask yourself is this: Does the current market phase impair or support my trading activities? In either case you can either change your current approach or just sit on the sidelines until you see better weather on the horizon. Unlike fund managers or professional traders you are only responsible for yourself and your personal assets, thus you are afforded the luxury of flexibility and the ability to be nimble. Once you are pushing a few hundreds of millions of Dollars around the dynamics of trading become quite different. It’s like the difference between driving a speedboat and an oil tanker. Say what you will – the speedboat is a lot more fun and if you’re lucky you’ll enjoy attractive company in sexy bathing suits.

Well it’s been a rough week and now it’s time to kick up our feet and crack open a cold one. I see you all next Monday morning.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.


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